Expect nasty surprises

Greenspan’s comments earlier in the month have raised hopes in the market that the US current account deficit is less of a problem than previously thought. However, it is difficult to follow this line of argument given the arithmetic behind the current account deficit . With the US savings ratio standing close to zero, domestic demand in the US outpaces other regions and US import growth will remain strong. Therefore, the US current account deficit is expected to widen by 15% to about $750 billion this year compared with about $650 billion in 2004. Such widening is significant and the US dependence on Asian central banks to finance this deficit could even increase further. This would hardly support a bullish greenback view. It is also questionable whether import substitution will be able to cap the rise in US import growth as core import prices have so far held fairly stable despite the 35% depreciation of the dollar index since first-quarter 2002. Against this background, there is no price mechanism reducing the demand for imports and nasty surprises in the trade data are likely to occur again in the future.